The Knesset Finance Committee has approved the treasury's proposal for handling multinationals' "trapped profits" - a move expected to add a one-time boost of NIS 3 billion to tax revenue.

Trapped profits are profits earned by multinational firms after they received tax incentives to invest in Israel. The ministry seeks to give the firms incentives to repatriate some of those profits while generating tax revenue; the government forecasts huge revenue shortfalls for this year and next.

Israel's Encouragement of Capital Investment Law granted tax exemptions to companies setting up plants in Israel but required them to pay tax if they paid a dividend from profits. Many of these companies therefore have not paid dividends.

Under the Finance Ministry's amendment to the law approved by the Finance Committee, the higher the profit transferred abroad, the higher the tax benefit these companies will receive. Gafni pushed through a change so that at least half the profits would need to be invested in Israel.

The proposal, which still requires approval by the full Knesset, would let multinationals pay only 40% to 70% of the taxes they would have owed, although no less than a 6% corporate tax rate. These companies would also be required to reinvest in Israel an amount equal to half the tax benefit they received.

Many politicians have argued against the tax benefit, saying the companies should be obliged to pay the full tax.

But Finance Minister Yuval Steinitz says the tax breaks will encourage the companies to free up profits that have been sitting in Israel for years, thereby boosting tax revenue and narrowing next year's expected revenue shortfall.

"At this stage it is important to make pertinent decisions and continue to preserve the Israeli economy for the good of its citizens," Steinitz said in a statement.

"The move I initiated will lead to billions of shekels in revenue from the large companies, which will save us from having to collect billions of shekels from the citizens of this country."

Last month, Israel implemented tax hikes and spending cuts aimed at reining in the budget deficit. For 2013, Israel will need more such measures to meet a budget deficit target of 3% of gross domestic product.

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